The myth
When you invest, you have the potential to earn income in different ways, like dividends from stocks or interest payments from bonds.
Reinvesting means that instead of spending these earnings, you’ll use the money to buy more of the same investment or try to grow it through a different asset.
Many people believe reinvesting is the best way to handle investment returns so that you can build wealth faster.
The reality
The idea behind reinvesting is that it may allow your earnings to earn their own earnings. This effect is called compounding.
When done consistently, letting your earnings compound means even small amounts can add up to something big over time.
That’s why many believe reinvesting is the way to go instead of taking earnings out early, spending them, and possibly missing out on more growth.
This approach is especially relevant for young people who have a lot of time to keep money invested. While you’re young, you likely have other income sources to support daily needs.
You’d be in a better position to leave investment earnings untouched since you wouldn’t have to fully rely on this income source for all daily expenses yet.
However, the main point of investing and saving for decades is to eventually use the money. Once you’re retired and need the income, it might be more appropriate during this life stage to live off investment earnings rather than reinvesting them.
Additionally, reinvesting may not be the right approach if you have a different investing goal in mind.
You may have created a dedicated portfolio of income-generating investments to use the earnings for a specific purpose, like boosting your budget or keeping money in cash for planned expense.
Verdict: It depends.
While reinvesting can be a powerful tool for growing money, especially while you’re young, what you’ll do with investment earnings should still depend on your unique situation and goals.
There is no strict rule to follow, but it’s wise to consider your long-term needs when deciding how to best maximize your money.
